How Digital Assets Create New Investment Opportunities

Tokens Cryptocurrency Zeus Exchange Blockchain Finance Trading FinTech Tokenization

08 crypto-assets-3

Tokenized assets are believed to provide access to a larger addressable market by including more asset classes and potential investors worldwide. We already discussed tokenized conventional securities here, so let’s concentrate on a different angle of the market.

Market participants start to identify clear benefits for asset-backed tokens backed by limited liquidity assets  such as private equity, private debt, art, real estate and other traditional financial instruments which have been traditionally difficult to find immediate buyers for. Among these benefits we can see:

  • Immediate liquidity for assets that previously had only limited windows of sale (like private equity) for professional and retail investors
  • Creating additional liquidity for assets like art and real estate
  • Opening access for smaller investors to exotic assets and collectables
  • Forming the future market for assets that are hard to quantify (like IP rights and music royalties)
  • Digital asset markets can operate irrespective of geographical location or time zones and provide trading opportunities to investors worldwide.

On top of liquidity benefits, blockchain technology (namely, smart contracts) may improve access to investment opportunities, automate part of due-diligence and compliance, and help involve more investors with a lower capital threshold.

We can look at each user case for asset-backed tokens a little deeper:

Private debt and equity tokens are used predominantly for startup business funding. These asset-backed tokens offer a digital ownership percentage of an immutable, liquid and trustless representation of company debt or equity. Such tokens performs the same functions as conventional securities (such as preferred shares generating dividends, or equity giving voting rights) and are subject to security laws which protect investors on some level. Except that this asset confirms ownership through blockchain transactions and makes fractional ownership possible. Even though debt and equity are already tradable assets, blockchain makes this process more efficient. It does, however, make it harder to track the cap table. For example, quoting Marc Boiron from FisherBroyles, even Carta, “the largest cap table management software provider for private securities, once began permitting fractional shares in its software - and then stopped” - it’s complicated even with no blockchain whatsoever.

Asset-Backed tokens for commodities: regardless of whether it is oil, natural gas, or gold, commodities which are already traded on third party exchanges can be tokenized. We’ve covered this type of security for publicly tradable assets here, so lets focus on tokens which are backed by physical assets. While it might be a valid and interesting tokenization case, such assets requires verification (storage house, deposit development and such) to establish the tokens validity. What’s interesting, is that these assets may represent a case for tokenization to use for the internal settlements within the company and company partners (settlement token rather than tradable token). Blockchain technology allows a transparent record of complicated transactions and tracks commodities, records contractual agreements, and serves as a trusted register for trade documentation. It can automatically execute contracts and be used to standardize procedures. Tokenization in this case would significantly improve transparency in the supply chain, verifying the ownership and origin of goods and enabling secure, reliable tracking. With the settlement happening in almost real time, blockchain would lower the clearing risk and diminish the role of clearing-houses, such as in the clearing of trades and in the physical delivery of goods.

Gold is currently traded as paper assets through gold futures, options, ETFs and other instruments, but tokenized gold represents a whole or fraction of a gold bar which is stored and audited for its weight, purity level, and its authenticity. Tokenizing physical assets such as gold eliminates much of the friction involved with holding, storing, and transferring the asset. The token owner can hold and benefit from gold as a store of value, or they can transfer it instantly to anyone else with a digital wallet. The physical gold remains in the same place, only ownership changes hands. However, any startup taking on this task will find itself in direct competition with banks, brokers and exchanges combined (e-gold saving accounts, gold bars, ETFs, futures, gold companies stocks etc). Experts also point out that many of existing gold-backed tokens offer questionable legal paradigms and vault solutions. It seems that the tracking token (for example, gold index) could be of more value as the solution than the tokenized physical metal.

Hard non-fungible assets (tangible and physical items or objects of worth that are owned by an individual or company) can back tokens to represent exotic assets like collectables. Each token is unique, creating digital scarcity with blockchain network participants knowing how many are in circulation. Collectables can be fine jewellery, furniture, art, and even wine. For example, currently, retail investors lack the opportunity to buy an ownership share of a rare piece of artwork since auction houses such as Sotheby’s and Christie’s control a majority of secondary art markets from the world’s financial centres. Tokenizing this asset class means that smart contracts are used to create joint ownership of artworks or art collections stored in museums. This also enables museums and galleries to raise funds needed to expand their collections as an alternative to high interest loans. There are many discussions on whether such an offering is a validated product fit in the market, so we will leave here with one more example. A collector who holds a piece of art, and is only able to sell it at the auctions, may gain additional liquidity via tokenization.

Soft non-fungible assets (intangible assets which have been traditionally hard to quantify and evaluate) like IP assets, copyright licenses, trademarks, patents and royalties from music and media rights generally have low liquidity and rare windows of sale. There is not even a market for secondary sale for such assets, so representing it on the blockchain can help develop this market, including price discovery, rights attribution, generating business models and so on.

While it’s a bit early to discuss which asset types would win the market, we believe that we are witnessing new markets (or market segments) being born and being merged with traditional financial markets at the same time. And as history shows, it will likely go the same evolutionary way, as financial markets before that.

For example, financial exchanges list thousands of stocks, bonds, indices, precious metals, commodities and futures, and they also list IPOs, pink sheets, penny stocks, low-grade bonds, obscure notes, rare metals and illiquid commodities, and every instrument eventually finds its customer - it just was not built in one day. We can’t start the market with an exotic option, but we can certainly build towards such an offering in the future, starting with the necessities.

Zeus’ view is that even if digital assets backed by limited liquidity or exotic assets and businesses would not be a full-blown new market, the blockchain eventually will simplify the underlying infrastructure and empower the internet of value.

 

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Zeus Exchange is a real-time hybrid trading platform that would allow investors to invest in digital assets and conventional financial instruments at a single place and at a low cost. Our vision is to leverage the traditional means of investment with the power of blockchain to allow our clientele to trade conventional financial and digital assets in a legal and transparent manner.

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